Flag Pattern

A popular trading pattern for both long and short traders is the flag pattern.  The flag pattern is a trend continuation pattern that usually happens after a big push up or down first thing when the market opens like you’ll see in the chart above of the SPYs. After the push up, shares slowly drifted down on lighter volume forming a rectangular shape before breaking out to the upside in continuation of the original move.

Ideally you would like to see volume pick up as shares break out but it doesn’t happen all the time. Profit targets on flag patterns is typically set for the same amount as the initial move. So in the above example, the SPY pushed about 30-40 cents in the initial move up, so that is how much you would ideally like to see on the break out.

This pattern also works great on the short side with the reverse formation of a bull flag setup. We would see a sharp selloff followed by an upward rectangular pattern forming before breaking out to the downside through the support.

When trading these setups you’ll want to wait and make sure the breakout candle closes above the resistance/support level to confirm the move. Sometimes you will see it push up and then quickly come back down signaling a false breakout. These are great patterns to watch for as they are a high probability setup that offer great risk/reward.

Pennant Pattern

The pennant pattern is another great setup that is very similar to the flag pattern but instead usually forms a triangular pattern. Shares generally make a sharp move either up or down and then consolidate in the form of a pennant with descending resistance and rising support.

When shares break out from this pattern it can be powerful as seen in the chart above of Facebook. You can trade this pattern as a short or long setup but as with the flag pattern it is always good to make sure the breakout candle closes above the support/resistance to confirm the move and there is an increase in volume on the breakout candle.

Final Thoughts

These are great patterns to trade and offer plenty of upside for the risk taken. If you miss the big initial move first thing in the morning you can always sit back and wait for one of these patterns to take place for a continuation. Flags may be a little trickier to see but with some practice you’ll understand what and when to look for it.